By Eric Savitz

Yes, one issue is the company’s refusal to directly respond to the ongoing Street anxiety about the health of CEO Steve Jobs, saying only that he has no plans to leave, and that his health is a “private matter.” But the real issue plaguing the stock this morning is gross margins. The company said its gross margin in the September quarter will fall to 31.5% from 34.8% in the June quarter. And more startling, the company said it expects gross margins in fiscal 2009 to be about 30%. That is sharply below the level most analysts had been modeling for next year, and it has triggered sharp EPS estimate cuts, as well as widespread reductions in stock price targets, which tend to be calculated from projected forward earnings.

The big mystery that emerged from the call was the company’s comment that a key reason for the lower margins related to a future product transition about which it gave no details. That has created a variety of theories on what Apple might have in store: Updated iPods? A refreshed line of notebooks? A tablet PC drawing on the touch capabilities of the iPhone? Something no one is expecting?

It is interesting that for all the high drama, I find only one analyst who actually changed a rating on the stock: Standard & Poor’s hardware analyst Tom Smith went to a Sell from a Buy, slashing his price target to $140 from $210. He specifically cited the forecast of lower margins, which he says “indicates a weakening trend.”

Here’s a rundown on what some of the other analysts are saying about Apple this morning:

Yair Reiner, Oppenheimer: He says the big news was the “knee-capping” of FY ’09 gross margins. “The obvious question is: what magnitude of product innovation (and revenue upside) would propel Apple to sacrifice so much profit?” he writes. “Our guess: something big. While product details and the appropriate growth adjustments will emerge over time, we note that innovation has always been the key to Apple’s growth and premium valuation…the near-term challenge for Apple’s shares is that the cost of the product enhancements will take an immediate toll on earnings forecast, while the potential long-term revenue upside will only be revealed in the ripeness of time, when the new products are introduced. This is a test of faith.” He cut his target to $213 from $235, but maintains an Outperform rating.

Chris Whitmore, Deutsche Bank: He cut his target to $200, from $235. In addition to the gross margin issue, he thinks the issue of Jobs’ health will remain. “The absence of a straightforward denial of health issues will increase speculation of a worst case scenario,” he writes. Whitmore keeps his Buy rating on the stock.

Keith Bachman, BMO Capital: Cut his target to $190, from $205. As many analysts wrote this morning, he says the long-term margin guidance is likely conservative. He also notes that at a least a portion of the gross margin impact will be for new products not yet in revenue guidance, “leading to potential upside.”

Bill Fearnley, FTN Midwest: Cuts target to $208, from $215. He thinks the unannounced news is a notebook refresh. “We believe AAPL is lowering its gross margin expectations because the cost of goods of the new notebooks will likely be higher than current models,” he writes. “We do not believe AAPL is lowering its notebook prices. Instead we believe AAPL is likely to update key components with higher COGS.

Tavis McCourt, Morgan Keegan: Cut FY ’09 estimate to $5.91, from $6.26. Maintains a Market Perform rating, but says that “any severe sell-off may prove to be an interesting point of entry.”

Mike Abramsky, RBC Capital: He contends the reduced margin outlook contains a “silver lining,” noting that prior product transitions has similar interim impact on financial results. He maintains an Outperform rating, but cuts his target to $200 from $220.

Gene Munster, Piper Jaffray: He maintains his buy rating and $250 price target. Munster says that the gross margin guidance “was a shock,” noting that over the last 7 quarters Apple has guided margin down an average 271 basis points sequentially, compared to 350 points last night. Munster thinks the company is readying new iPods and new portables; he sees an 80% chance of redesigned MacBooks and possibly MacBook Pros. “We believe Apple is getting slightly more aggressive with its pricing; but overall the company is not diverting from its strategy of premium pricing.”

Scott Craig, Bank of America: Target price cut to $180, from $190, but keeps Buy rating. “Management is likely being conservative and pointed in ‘investments in front of them,’ which to us implies that the company is either introducing new, lower margin products or that near-term pricing actions are likely.”

Toni Sacconaghi, Bernstein Research: He notes that the forward guidance on ’09 margins was unusual, breaking with the company’s habit of looking out one quarter at a time. His theory on the margin issue: in addition to the usual conservatism, he thinks there is “a potentially significant forthcoming set of re-pricing actions on new products, most likely in Apple’s notebook or iPod lineup.” He contends Apple appears to have decided to drive gross margin dollars with high volume and lower margins, not unlike its recent price cuts for the iPod Shuffle and the iPhone. Sacconaghi also notes that there were some signs of weakness in the U.S. business, with Mac sales at Apple stores up 44% year-over-year, the slowest growth in 9 quarters. Apple store traffic was down sequentially to 32 million visits from 33.7 million. Sacconaghi says a “strong pullback” could provide an attractive entry point, but he doesn’t think $150 is the right price. At that level, he notes, the stock trades at a comparable multiple to both Google and Research in Motion, despite lower revenue and EPS growth for next year. He keeps his Market Perform rating and $175 price target.

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There are 52 comments

JULY 22, 2008 11:13 A.M.

Anonymous wrote:

I think Apple is ready to introduce a sub $500
computer, during the Jobs era they paved ground for a major boost in PC sales.
if Apple enters the sub $500 market with a touch like device , then they will sacrifice margins for market share and profits.. lower margins doesn't necessarily means lower profit
and they can easily claim the #1 pc spot in a couple of years

JULY 22, 2008 11:29 A.M.

FreeRange wrote:

Tom Smith of Standard & Poors is an idiot. First, this article says he is a hardware analyst. Apple is not a hardware company. They are a systems company, and provide a complete computing platform. And it is their incredible software, its attendant ecosystem across all product lines, along with great hardware that make this a great company. With people lined up around the world to buy their products, and once again blowing the doors off the analysts projections this past quarter, you go from $210 to $140? What are you smoking Tom? Have you ever even been in an Apple store?

JULY 22, 2008 11:31 A.M.

Anonymous wrote:

Apple is very, very conservative on earnings guidance. When releasing a projection they need to make all the math work so they need to say margins will be lower. This is done all the time. Amazing the market sells off so often on that "new." The "crowd" is still positive on AAPL, see:http://www.piqqem.com/equity/view/AAPL
orhttp://www.piqqem.com
for more info on the sentiment data.
Watch when they announce current quarter earnings, they will blow away their own projections.

JULY 22, 2008 11:34 A.M.

Russell Curtiss wrote:

Apple is selling 1 millon iphones a week by my math that is about $250,000,000 in sales a week. Discounting competely: the apps store, accessory market, halo effect to other Apple products and that they are currently in only in a limit number of countries and that by the end of Augest they will expand there market to many more counties - I can see Apple doing almost 10 Billon dollars in sales this quarter.

JULY 22, 2008 11:38 A.M.

FreeRange wrote:

"Bill Fearnley, FTN Midwest: Cuts target to $208, from $215. He thinks the unannounced news is a notebook refresh. “We believe AAPL is lowering its gross margin expectations because the cost of goods of the new notebooks will likely be higher than current models,” he writes. “We do not believe AAPL is lowering its notebook prices. Instead we believe AAPL is likely to update key components with higher COGS."

Bingo - someone who actually follows and understands the company!!! Good job Bill...

JULY 22, 2008 11:40 A.M.

Apple Heavy wrote:

My bet is Apple is moving to solid state drives in laptops to take advantage of steep drops in prices for flash memory (re Sandisk warning), but which cost more than optical drives.
And, higher capacity iPod touches at lower prices will likely be offered in time for the holidays.

JULY 22, 2008 11:45 A.M.

Apple Heavy wrote:

.. Oops slip of the mind; I meant HDD, not optical drives being replaced with solid state ones....

JULY 22, 2008 11:46 A.M.

The Dude wrote:

Toni has outdone himself. He compares the multiple to RIMM and GOOG, but ignores the iPhone's subscription model of accounting, which defers earnings. It's an apples to oranges comparison. I'd like to see at least one of these analysts do a P/FCF comparison. AAPL's deferred earnings now stand at over $2B, and this will explode in the current quarter w/ the 3G sales.

JULY 22, 2008 11:47 A.M.

sten wrote:

Analysts LOL One big wall street joke. And yet many of us are lemmings are quote them. Let me get this right...

They were all wrong the first time around with their predictions and upgrades. Now they run the other side with price cuts and downgrades. And we are to believe them ?

Some many have made careers just by blinding quoting others.

JULY 22, 2008 11:54 A.M.

Dave wrote:

Apple Heavy has the best analytical thoughts vs. ALL of the highly paid "analysts". Brilliant thinking!!!

JULY 22, 2008 11:55 A.M.

Dan D. wrote:

Note the comment on competitor's living under the Apple Umbrella. I would look for a an Updated $500 MacBook for back to school. It would kill their competition. They have real market share for the first time and seem to be going from higher margins to higher volume. Same as IPhone 3G which is superb!

JULY 22, 2008 11:56 A.M.

Jack M wrote:

Idiots!

JULY 22, 2008 12:06 P.M.

antie wrote:

Classic pump and dump. Dont think the analysts are finished yet? When apple breaks down through 145 the big houses like Goldman will be busy kicking it to the curb. The market share gains apple hopes for will be bought with shareholder equity. Arrogance has infected management. Too much success bred contempt for the market and carriermasters. Now its their turn to play hardball with apple, and they will!!I think the rebates will diminish over time and are much less than current speculation.

JULY 22, 2008 12:07 P.M.

reethinke wrote:

It is way beyond disturbing how when anyone says anything negative about Apple, Inc. people (fanbois) flood the blogs with rants. Incredibly creepy. You want to prove people wrong? Stop posting and start buying AAPL shares.

JULY 22, 2008 12:17 P.M.

Analysts Don't Have a Clue wrote:

Apple growth is accelerating and the iPhone is now adding to a great future for the company. Apple's halo effect, new retail stores, new applications for the iPhone, great customer service, innovation, deferred revenue, etc. are lost to the analysts. Analysts are lost to the fact that Apple will be HUGE in the next decade.

JULY 22, 2008 12:36 P.M.

Domingo A. Trassens wrote:

I don’t believe Apple is in a risky situation if Steve Jobs continues driving the company. Till now, Apple needs Steve Jobs because iPhone lines requests more efforts to gain market share before Nokia and others advance in the smart-phone segment. The manufacturer didn’t finish the recreation of its “business model”… Maybe, at future, Steve could take vacations…

so i guess only Tom Smith will look like a fool, since his use of the words "weakening trend" seems ignorant of the reasons Apple gives for the cut in margin.

As for Toni, the 44% he cites is just a bit less than the 46% growth in 4Q07, nine months ago. But bigger still, he ignores the 250M qoq hike or 310M yoy hike (38%) in Mac units sold in the Americas region, which is the largest jump since the iMac was introed in the last millenium. I'm sure Best Buy had something to do with this.

JULY 22, 2008 1:02 P.M.

jmmx wrote:

Re: Toni's quote.

Of course the number of visits to stores was down - they did not have any iPhones for sale for half that time.
.
I wonder what the store traffic has been since July 11.

JULY 22, 2008 1:08 P.M.

d_st wrote:

Consumers buy Apple products because they continuously come out with new products not because of Steve Jobs. Steve Jobs is currently a great CEO but he won't be the CEO forever. Jobs used to be a bad CEO in the past when he wouldn't drop Mac prices and the company lost market share resulting in his resignation. But Jobs returned and created the iPod which revived Apple. The products make Apple not Jobs.
Outlooks don't mean much. Nobody can predict the future. Opperheimer was saying "I don't know" by placing a conservative number for the outlook. The financial crisis is over a year old, the Fed has done all it can to fix the problem. The financial crisis won't last forever. People who think the crisis will continue think the world is ending. The fact is, international sales are holding the US economy up while Americans are being cheap. So Americans need to be grateful to the international community. Only spending mainly from the government which transfers down into consumer spending will get countries out of a recession.
Check out this blog: http://www.sports--today.blogspot.com

JULY 22, 2008 1:17 P.M.

jmmx wrote:

Let us suppose that Apple sells 10 Million iPhone 3Gs by year's end. (This seems like a reasonable figure - probably conservative, but reasonable)
- @ $600 gross to Apple (rounding0
- @ 30% NET = $180 NET Profit each.
- divide by 24 Months = $7.50
- X 3 = 22.50 per quarter
- X 10 million = $225 Earnings / quarter
-
- that means that Apple will realize approximately $0.25 per quarter for the next year and a half form these sales alone - even if they close up and go home.
- Pretty darn good if you ask me.

JULY 22, 2008 1:30 P.M.

"Psychologyofthecall.blogspot" wrote:

POTC does not believe AAPL's 200 day moving average of $158 will be broken on close Tuesday. We recommend aggressive portfolios take advantage of Tuesday's open, as the negative sentiment has been exacerbated by unrelated companies, specifically American Express (AXP) and Merck (MRK).

Please understand oil was up today because of Dolly, a hurricane/storm that shouldn't cause any major disruptions to platforms, although sensitivity in the market is quite a different matter.

We look at today's negative after market earnings from AXP and the news MRK will no longer provide yearly guidance until legal issues with drugs Vytorin and Guardasil are resolved as a great opportunity for the bear rally to continue. Cheers to our contrarian readers!

We continue to see oil breaking through $125/barrel this week, and that will cause many to notice AAPL's support/strength above the 200 day moving average.

Thank you for your after market Monday attention, the Psychology of the Call team.

JULY 22, 2008 1:37 P.M.

aapladay wrote:

ha! well it looks like i'll have to hope for the new product transisition to be the catalyst for the stock to go back up. well, im probably done here for awhile. tired of trying to talk up my fave company just to be slapped in the face everytime earnings are smashed. you guys have fun with your little games and war of words. here's to you Tom with your really bad grammar and constant Apple bashing, to Lucifer, to Antie, to Eric, to Toni.... your right, you win, AAPL sucks.... Im out....

JULY 22, 2008 1:47 P.M.

tito wrote:

where's doris? i need a recipe for smashed apples.

JULY 22, 2008 2:14 P.M.

Hang tough wrote:

AAPL investors don't sell your stock, hang in there!!

Hopefully the shorts will have to cover their position soon and AAPL will be back above 160

JULY 22, 2008 2:35 P.M.

chapin wrote:

jmmx - your numbers are off. Apple's operating margin is 20%. Even if the iPhone was above corp margins at 25%, tax adjusted is $0.15/qtr

JULY 22, 2008 2:53 P.M.

Whatever wrote:

What is going on w/the stock all of a sudden?????

JULY 22, 2008 2:55 P.M.

hags wrote:

I believe Apple will invest substantial currency into their Xserve business and will take on the likes of HP and IBM as well as Windows vs Leopard for the server platform for small and medium size businesses.
Lower margin on Enterprise server sales, yet substantial increase to their revenue base and a halo affect on the iMacs.

JULY 22, 2008 3:02 P.M.

antie wrote:

Shorts started covering incl me at the open. New shorts will arrive at 160 or so.

JULY 22, 2008 3:08 P.M.

barkingk9s wrote:

161.92 will be tough between now and the close.Have covered all short puts sold early today.Welcome back Antie.

JULY 22, 2008 3:09 P.M.

antie wrote:

aapladay...what gives, as soon as you quit the stock took of like a rocket. Keep the faith, will be a good buy in 2 or 3 weeks. Market needs buyers and sellers.

JULY 22, 2008 3:14 P.M.

antie wrote:

barking...thanks, just got short again. This is really fun. Glad you made a ton today. I really came down hard on 159.5. Sell, sell, sell.

JULY 22, 2008 3:19 P.M.

antie wrote:

Hell of a bounce, stock still has some life. Come on longs the market needs some buyers, wheres your faith in Oppenheimers mystery new products on the cheap? Analysts will have a good ol time tomorrow too.

JULY 22, 2008 3:29 P.M.

antie wrote:

What a great market, GE and GMs leading the market up. SNDK going to $12 TXN to 20. Hoping to get somemore selling in at 159. Wheres the buyers?

JULY 22, 2008 3:35 P.M.

Apple Heavy wrote:

I am buying, and will be buying more tomorrow to help get the squeeze on.

JULY 22, 2008 3:43 P.M.

barkingk9s wrote:

over 60m shares traded so far with 20 minutes to go.How much of this was longs bailing,shorts covering,new longs coming in? Any ideas?

JULY 22, 2008 3:51 P.M.

antie wrote:

Barking...Where is the 161.92 number from ? I had 159.70 until Apple Heavy put his squeeze on.

JULY 22, 2008 3:54 P.M.

AAPLpie wrote:

Simple, the hedge funds made their killing already. Classic head fake, just like last earnings call...short the stock, get everybody in a panic, the lemmings all sell, cash in, and then buy up all the cheap stock and get ready for the blow-out quarter. I scooped up some great bargains this morning!!

JULY 22, 2008 4:03 P.M.

Apple Heavy wrote:

To all AAPL longs: good job, we did it!!
Lets go for $175 by Friday.

JULY 22, 2008 4:12 P.M.

barkingk9s wrote:

antie...I use a slew of technical indicators which I have found to be helpful over the years(dare I say decades).When I see price action like today in Apple I look at braoder trading guidelines.This one came from looking at intraday bollinger bands (8,10,13 minute),all fibinachi numbers,(sp?) in conjunction with the daily lower B-band.More time than not this allows me to catch big chunks of a daily move.

JULY 22, 2008 4:14 P.M.

barkingk9s wrote:

yes I know 10 is not a fib number but I use it anyway.

JULY 22, 2008 4:21 P.M.

Apple Heavy wrote:

Keep Shorting fellas; According to my unscientific analysis, the markets bottomed on July 15.
Now that the big 'disappointments' are out of the way........ look out.

JULY 22, 2008 4:31 P.M.

barkingk9s wrote:

apple heavy....you very well could be correct.this type of bounce with this type of volume is extremely immpressive.I am long Apple and have been for years, however one would be nuts not to have been hedged coming into an Apple earnings week.As I mentioned earlier I lifted my hedge on the open and was actually even more long via the short 150,145,140 puts which I sold during the first hour of trading and lifted this afternoon.

JULY 22, 2008 4:45 P.M.

antie wrote:

Barking...Stock filled the 4/17 gap up at 156 and just overshot resistance at 159.63. Thats apple, momentum, short covering and Apple Heavy. Thanks for the info about the source of 161.92. AAPLpie..good to hear from U. Wouldnt hold onto your 148 buy too long, its a little early to get ready for next periods report. My onlr worry is that they fire Oppenheimer or take Jobs out of the product pricing mix. That would be a great catalyst for apple. He is the architect of their screwed up accounting.

JULY 22, 2008 5:03 P.M.

AAPLpie wrote:

This is going to be one mongo back-to-school quarter. Wish I could have bought more this morning but I am out of money and margin. Was hoping AAPL would have already announced they sold 2 million 3G iPhones, but I guess they won't bother when it happens. Too bad, I would like to see that running counter somewhere. Still lots of iPhone play over the next couple of months...and we'll eventually get to Russia and China. Most importantly, AAPL will sell a truly astounding number of laptops this quarter. Cool.

JULY 22, 2008 5:06 P.M.

AAPLpie wrote:

Antie, the accounting is screwy, but that's no excuse for these idiot analysts not being able to make sense out of it. But...if it is necessary to give people free s/w upgrades, just ask anyone who had an original iPhone and got the great 2.0 s/w upgrade for free how great a deal that is. And, most importantly, it helps people understand iPhone is really a computer, not a stupid phone.

JULY 22, 2008 5:08 P.M.

antie wrote:

barking...I see what your saying on on the bands and fib. The volume would impress me more if the stock price closed up. The indication on a down closing is that shorts were covering and we cant be certain that buyers emerged yet. We will know for sure tomorrow in the aftrnoon. AAPLpie..good to hear from you, still need to tone it down a little. Maybe a little early to get ready for next report??

JULY 22, 2008 7:03 P.M.

Apple Heavy wrote:

Congratulations to all; this was a good blog, civil and, dare I say, professional (at least compared to the analysts).
Very informative for me.

JULY 22, 2008 7:21 P.M.

Mike wrote:

Ditto antie, fire Oppenheimer, best thing for Apple! That far off for many years now, the guy is an idiot.

JULY 22, 2008 7:47 P.M.

antie wrote:

Now I'm loading up on Rimm.

JULY 22, 2008 7:49 P.M.

Real antie wrote:

I'm still waiting for my $86 a share call to come in. Hang in there it's coming.

JULY 22, 2008 11:09 P.M.

aapladay wrote:

antie, im not quitting the stock. im just tired of all the b.s. news. its summer and ive got better things to do than to read this crap everyday. if i do post, it'll be at "seeking alpha". even though you say things i dont like to hear, you are an educated person. most people on this blog are only here to taunt when it goes up or down. it's like having to actually read all your junk mail, screw that..

JULY 22, 2008 11:55 P.M.

AAPLpie wrote:

Difference between short-term view and long-term view. Short term, I'll take the blond at the bar. Long term, I want someone that I know I can count on. AAPL is growing like crazy and it's a winner. I rode Dell, Microsoft, Yahoo, Cisco, Google, RIM, etc. to great valuations before jumping off and will do the same with AAPL. AAPL is nowhere close to being stale yet. All the B.S. from the short-timers who only bother to declare their wins while glossing right over their losses is just background noise. When they are really stupid, like this morning, I just buy more shares because, guess what, the line at the AAPL store is still outside the door...full of people with plenty of money.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.